Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.

Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.

However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.

A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.

The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.

Featured Communities

Testimonials

Annie responded to our first contact to her email immediately and every request there after with the same expediency. She was very professional and personable with all our dealings. She has made our buying a very pleasurable experience. We would recommend her highly.Ernest Stewart

Ben was a great agent and was able to work well with my unconventional work schedule to provide showings and advice/assistance... And his assistance throughout the buying process was invaluable... I would definitely recommend Ben and all the staff at Sherlock Homes for anyone that needs a great real estate agent...Tim Herron

I would highly recommend Jill Yaeger and Sherlock Homes to anyone looking for a great agent to work with when buying or selling your next home! Jill was extremely helpful throughout the process of purchasing our last two properties, as well as the one we are currently selling. She is very pleasant, knowledgeable, and helps make the process of buying or selling a home much easier! Thanks for everything you have done to help!Derek Guiton